High Court Asked to Decide If ERISA Pre-Empts Local Health Insurance Mandate

Are state and local "play-or-pay" laws that require employers to make minimum monthly health care payments for employees pre-empted by the Employee Retirement Income Security Act (ERISA)? The U.S. Supreme Court has been asked to resolve a disagreement among federal appellate courts on this issue.

Here's what employers need to know as they wait for the high court to decide whether to review ERISA Industry Committee v. Seattle.  

Seattle's Ordinance Challenged

Seattle enacted an ordinance requiring large hotels to offer certain employees health insurance or pay them additional compensation. "The ordinance gives those employers the option to comply by making expenditures through their ERISA health benefit plans instead of paying the additional cash directly to the employees," according to a brief filed by the city of Seattle on April 25.  

The ERISA Industry Committee (ERIC), an employer advocacy group, challenged the ordinance, arguing that it is pre-empted by ERISA.

According to Supreme Court precedent, "One of the principal goals of ERISA is to enable employers to establish a uniform administrative scheme, which provides a set of standard procedures to guide processing of claims and disbursement of benefits."

The 9th U.S. Circuit Court of Appeals, however, sided with Seattle and held that ERISA does not pre-empt the ordinance because "an employer can satisfy the law through direct cash payments to employees, regardless of whether it has an ERISA plan and without changing a word in its plan if it does have one," attorneys for Seattle noted.

ERIC appealed the decision to the Supreme Court, and the Society for Human Resource Management (SHRM) joined a friend-of-the-court brief supporting ERISA pre-emption in the case. 

The case is significant for SHRM members "who are at the forefront of the employer-sponsored health coverage system," according to the brief. "The complex compliance scheme required by the Seattle ordinance, upheld by the 9th Circuit, increases the overall employer burden of administration and costs that are borne by employers and, typically, shared in part by employees," SHRM said.

Alex Lakatos, an attorney with Mayer Brown in Washington, D.C., said employers and employees alike would benefit if the Supreme Court grants certiorari, reverses the 9th Circuit and bars play-or-pay laws.

"Myriad employers want to, and do, provide benefits to their employees through benefits plans governed by ERISA, and employees certainly want to receive those benefits," he said.

ERISA Pre-Emption

ERISA pre-empts state and local laws that "relate to" ERISA-covered employee benefit plans. "This broad pre-emption provision encourages employers to offer employee benefit plans by eliminating the costs and complications of tailoring plans to the local policy preferences of every jurisdiction in which they operate," ERIC said in its petition to the Supreme Court.

Seth Safra, an attorney with Proskauer in Washington, D.C., explained that pre-emption is a fundamental part of ERISA's structure. 

"Pre-emption gives employers flexibility to design benefit programs based on a clear set of guidelines that is consistent across jurisdictions," he noted. "Without pre-emption, employers would be subject to a patchwork of state and local rules that conflict with one another and often conflict with federal requirements."

Seattle has worked around ERISA's pre-emption rule by characterizing a benefit mandate as a choice, Safra said. Rather than saying employers must provide minimum benefits or pay a penalty, Seattle has said employers must pay a tax (which is essentially a penalty) unless they provide minimum benefits.

"If Seattle's approach is upheld, it can open the floodgates for other jurisdictions to impose minimum mandates on employee benefits," Safra noted. "It does not take much imagination to appreciate the administrative nightmare that large employers would face if they had to comply with a host of different mandates across the country."

What's Next?

If the Supreme Court grants ERIC's petition and addresses the disagreement among federal appellate courts over whether state and local play-or-pay rules are pre-empted by ERISA's broad pre-emption provision, Lakatos said, the resulting decision may well "sound the death knell" for these laws.

"Moreover, in the wake of a ruling against play or pay, it is unlikely other similar laws will be enacted, and if they are, they are unlikely to survive judicial scrutiny," he said. 

Safra noted that issue is not limited to health plans. "Without limits on the [play-or-pay] end run around ERISA pre-emption, states and cities would be able to mandate retirement and other types of benefits as well."